As we had predicted (6/11/07 TVBR #113), disgruntled preferred shareholders have sued over the terms they've been offered in the reorganization of Ion Media Networks. Citadel Investment Group has already bought out most common shareholders under its deal with NBC Universal to take Ion private, but all along there has been more resistance from the preferred holders.
Many of the large preferred owners, including AIG, which had led the group that succeeded in getting Citadel/NBC Uni to sweeten the pot a bit, have already sold out and moved on – leaving arbitrageurs to collect the final few pennies between the recent trading price and what the new securities to be issued under the exchange offer are worth. But some of the preferred shareholders who had fought the deal still have their shares and have now sued in Delaware Chancery Court to try to block the exchange offer from going forward. The lawsuit doesn't specify how much of the 14.5% Sr. Preferred shares the plaintiffs hold, but they claim they are being cheated out of its value by the proposed exchange. Their suit claims that the exchange offer violates the terms of the preferred stock and gives hundreds of millions of value to otherwise worthless securities held by Citadel and NBC Uni at the expense of the other preferred shareholders, that is unless the other preferred shareholders agree to take a value haircut. This "represents the worst type of insider abuses," the suit charges.
Should the holders of the 14.5% Sr. Preferred shares accept the exchange offer, they would see the face value of their securities drop by 155 million to around a half billion. They've asked the court to block any action which would diminish the value of the preferred shares as they stand now and prohibit NBC Uni from exchanging its own Jr. Preferred shares for new securities which would move ahead of the plaintiffs in Ion's capital structure.
SmartMedia observation: The exchange deadline isn't until July 10th, but with AIG and some other former major holders out of the picture, it seems certain that most of the preferred shares (absent a court order blocking the exchange) will be submitted for conversion to the new bonds which will move them up in the capital structure at Ion, albeit at a lower face value. A lot of the objections to the Citadel/NBC Uni deal seem to revolve around the claim that Ion's board of directors breached its fiduciary duty to shareholders by not pursuing a buyout offer from EchoStar. We understand, though, that Charlie Ergen never made a formal offer and that talks about a buyout bid for two billion plus never got beyond the preliminary stages.